Shorting VXX Using VIX/VXV Ratio

Strategy

This strategy has a bit more complexity than my other posts. It is essentially taking advantage of the VIX Futures’ Term Structure. I won’t go into too much detail, but this article does a great job of explaining the nuances. A brief summary is that since VIX Futures are usually in contango, VXX managers must buy high and sell low leading to a decay in the product value. To capitalize on this, a proxy for the contango is to use the actual VIX index along with the VXV index. We then take the ratio of the two (VIX/VXV) and determine whether it is less than 0.95 (this was an optimized figure, but as with all optimized portfolio strategies, there is a risk of over-fitting). If the ratio is below the threshold, we are generally certain that the VIX Futures’ Term Structure is in heavy contango and will short VXX; otherwise, we move to cash.

Backtest Summary

Performance Measure

Value

Annual Return

0.47

Annual Volatility

0.37

Sharp Ratio

1.22

Max Drawdown

-0.43

Alpha

0.29

Beta

1.17

/* Here you can add custom CSS for the current table */ /* Lean more about CSS: https://en.wikipedia.org/wiki/Cascading_Style_Sheets */ /* To prevent the use of styles to other tables use "#supsystic-table-1" as a base selector for example: #supsystic-table-1 { ... } #supsystic-table-1 tbody { ... } #supsystic-table-1 tbody tr { ... } */

Worst Drawdown Periods

Rank

Drawdown in %

Peak Date

Valley Date

Recovery Date

Duration

1

-0.3858

11-01-2015

02-07-2016

2016-07-13

183

2

-0.2728

02-18-2013

06-19-2013

2013-08-02

119

3

-0.2583

12-04-2014

01-29-2015

2015-04-09

90

4

-0.2078

09-17-2014

10-21-2014

2014-11-26

50

5

-0.1297

08-09-2015

08-20-2015

2015-10-08

44

/* Here you can add custom CSS for the current table */ /* Lean more about CSS: https://en.wikipedia.org/wiki/Cascading_Style_Sheets */ /* To prevent the use of styles to other tables use "#supsystic-table-1" as a base selector for example: #supsystic-table-1 { ... } #supsystic-table-1 tbody { ... } #supsystic-table-1 tbody tr { ... } */

Stress Events

Stress Events

Mean

Min

Max

US downgrade/European Debt Crisis

0

0

0

Fukushima

0.005

-0.015

0.039

EZB IR Event

0.001

-0.023

0.03

2009Q1

0

0

0

2009Q2

-0.002

-0.06

0.026

Flash Crash

-0.064

-0.106

0

April 2014

-0.001

-0.057

0.031

October 2014

0.002

-0.077

0.063

Fall 2015

-0.004

-0.066

0.011

GFC Crash

0

0

0

Recovery

0.002

-0.183

0.155

New Normal

0.002

-0.173

0.082

/* Here you can add custom CSS for the current table */ /* Lean more about CSS: https://en.wikipedia.org/wiki/Cascading_Style_Sheets */ /* To prevent the use of styles to other tables use "#supsystic-table-1" as a base selector for example: #supsystic-table-1 { ... } #supsystic-table-1 tbody { ... } #supsystic-table-1 tbody tr { ... } */